South African policymakers, legislators and regulators need more engagement with the fintech industry before distributed-ledger technology can be incorporated into the nation’s financial markets, according to a new report by the central bank and the Intergovernmental Fintech Working Group.

A distributed ledger is a digital record of transactions and contracts maintained in a decentralised form across different locations.
The technology underpins cryptocurrencies such as Bitcoin and is being experimented with in large parts of the global financial system.

With legislative reforms in the payment system underway in South Africa, it’s an opportune time to consider how to treat distributed ledger-based platforms and the use of tokenisation in financial markets, though efforts should be made to ensure rules are technology-neutral, principle-based and borne out of collaboration, the Reserve Bank and the working group said in a statement Wednesday.

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The two bodies have completed a joint proof-of-concept project exploring the policy and regulatory implications of distributed-ledger-driven innovation in financial markets.

“The insights gained through practical exploration should lead to greater regulatory clarity – both for innovators and for regulators – and should be in the broader interest of ensuring a level playing field for all market participants,” Governor Lesetja Kganyago said in an online speech.

Regulators should move with caution when considering developments before amending rules and should be “fully appreciative” that regulated entities need clarity to committing to distributed-ledger markets, he said.

Under the experiment dubbed Project Khoka 2, the central bank and working group issued, cleared and settled debentures using distributed-ledger technology and tokenized money to inform policy and regulatory reflections.

The working group included the Johannesburg Stock Exchange and South Africa’s top four banks: Absa Group, FirstRand Bank, Nedbank Group and Standard Bank Group.

To operate a distributed-ledger technology-based financial system, new capabilities are needed across all role players and new platforms will need to be integrated with legacy systems, the central bank and working group said said. The costs of such a move – that ought to be borne by all market players – will have to be offset against potential benefits, new standards, best practices and a supporting ecosystem will also have to be put in place.

“A transition to a DLT-based system requires careful planning and execution and may involve running a DLT-based system in parallel to the existing system for a while, perhaps indefinitely,” they said.